Q1 2022 CNH Industrial NV Earnings Call
Good morning, and afternoon, ladies and gentlemen, and welcome to today's T. A niche industrial trade to 'twenty, two first quarter results conference call and webcast. After the Speakers' remarks, there will be the question and answer session. If you wish to ask a question. Please press star one on your telephone keypad at this time I would like to turn the call over.
So Norway How's the Investor Relations. Please go ahead Sir.
Thank you Nadia good morning, and good afternoon to everyone. We would like to welcome you to the webcast and conference call for CNA to Industrial's first quarter results for the period ending March 31 2022.
Call is being broadcast live on our webcast on our website and is copyrighted by C and H industrial any other use recording or transmission of any portion of this webcast without the express written consent of <unk> industrial is strictly prohibited.
Hosting today's call are <unk>, Industrial's, CEO , Scott wine and CFO , Donnie and she said.
They will use the material available for download from the <unk> industrial website.
Please note that any forward looking statements, we might be making during today's call are subject to the risks and uncertainties mentioned in the safe Harbor statement included in the presentation material additional information pertaining to factors that could cause actual results to differ materially is contained in the company's most recent report 20-F and EU ending report as.
Well as other periodic reports and filings with the U S Securities and Exchange Commission and the equivalent authorities in the Netherlands and Italy.
The company presentation, maybe may include certain non-GAAP financial measures additional information, including reconciliations to the most directly comparable U S. GAAP financial measures is included in the presentation material I will now turn the call over to Scott.
Thank you and welcome to everyone joining our call.
And our first quarter as a pure play agriculture, and construction business, we delivered strong sales growth of 13% year over year. This.
This demonstrated the tremendous execution of our team who successfully navigating significant supply chain challenges raw material cost inflation and a volatile geopolitical environment I'm incredibly proud of what they've accomplished and for their deep commitment to make in C and H industrial better every day for our customers.
We are spending more than normal on expedited freight and we continue to adjust production schedules to accommodate for parts shortages.
Finished machines in our factories and in transit inventory between our overseas locations were notably above plan at end of quarter.
April production improved and we are confident that we will be able to deliver more for our customers in the second quarter.
Judging from conversations and other insights our customers and dealers are managing fairly well in this difficult environment is increase increased soft commodity prices helped balanced farm income, which has been hurt by rising input costs.
For construction work.
We are seeing high demand in all of our regions overall dealer inventories of both new and used machines, Alright historic lows and service work and part sales are robust providing reasonable support to our mid term outlook.
In addition to positive progress with our rabid integration. We're also pleased to announce last week the successful divestiture of the engineered films Division.
Well no longer while we no longer expect meaningful supply improvements in the second half and other external risks will likely endure our original guidance included contingencies for such events, we remain confident in our execution and expect our AG and construction end markets to have more incremental resiliency than the general economy. So are out.
Look for the year remains unchanged.
As a reminder, our AG segment now represents 70% of CNA to industrial revenue and slightly more of our earnings.
Derek Nielsen and his team are definitely managing their business and brands through the storm driving net sales up 13% on a constant currency basis supported by favorable price realization and positive mix in north and South America.
For the quarter AG pricing was up 12% again more than offsetting rising costs.
Order books also remained strong up 40% year over year for tractors and combines in this certain this number will certainly improve in the coming weeks when we open up our order books for model year 'twenty three.
The war on Ukraine, as a humanitarian tragedy and its ramifications have global reach.
The impact on food supplies is concerning and we are closely watching the volatility in commodity prices and various farm input costs.
However, it is the repercussions of energy inflation, especially escalating fuel cost that is most concerning is they may have an even more adverse effect.
We have all we have suspended all operations in Russia and are offering financial and housing assistance for our employees based in Ukraine.
We're supporting our Ukrainian dealers and have been able to redirect shipments minimizing the wars financial impact on our business.
Precision AG take rates continue to increase with our combination of factories that an aftermarket digital offerings up almost 15%.
With the <unk> and P. L M connect performing well and our overall precision offerings expanding rapidly with Raven, we are continuously developing better solutions for our customers.
During the first quarter, we were excited to introduce the new.
New Holland T six methane tractor in the U S reinforcing our commitment to advance sustainable farming practices.
This incredible machine is the culmination of a multi year development project to build a tractor that runs on sustainable fuel naturally generated by farming operations.
Construction equipment, maybe the smaller of our two.
Divisions, but the successful turnaround and Stefano pop Maloney and his team are delivering makes them a vital part of our future.
Net sales in the quarter increased 23% on a constant currency basis to $803 million Encouragingly. This was the segment's most profitable first quarter in over a decade delivering $32 million in adjusted EBIT had a 4% margin.
Pricing was up high single digits, construction, which contributed to their improving profitability without the term market share gains across various product categories in North America and promising results in Europe .
Okay.
Our improving <unk> performance is fundamentally sound with a strong focus on product quality and design and expanding our market reach through superior on an acquisition.
Commensurate with this progress order books continue to build up year over year for both light and heavy equipment across all regions in North America. We are practically sold out for our 2022 production slots.
This case construction equipment celebrates its 180 <unk> anniversary, we're even more convinced that there is a profitable future ahead, both for <unk> and our new highly construction brand.
Precision technologies, an ambitious journey of transformation and growth and it is exciting to see the highly capable team Prague garg as assembling to accelerate our progress.
We are partnering with customers to further enhance how our technology is used in the field unlocking value with each software upgrade and expanding the number of our of connected vehicles and our new product launches.
We're also optimizing auto guidance performance in releasing more till its prescription features to increase farm productivity and reduce fuel and other input consumption.
Raven is catalyzing further progress supplying more robust architecture that satisfies the rigorous requirements for future AG features while enabling much faster progress for our advanced autonomy and automation developments.
During the first quarter, we opened a new advanced Engineering center in Scottsdale, Arizona focused on artificial intelligence and data science for autonomous vehicle platforms and precision agriculture applications.
Along with our New Technology Center in India, we are positioned to efficiently code to cab on an almost 24 hour basis. These and other initiatives have expanded and accelerated our software development capability and set the stage for future progress and we look forward to seeing our customers reap the rewards.
In February we laid out five strategic priorities that will be critical to our long term success.
Much of our current energy goes towards solving ongoing supply chain challenges, but we also invest heavily to ensure we're making consistent strategic progress each quarter I plan to provide highlights from a subset of these initiatives.
Customer inspired innovation informed all that we do.
I was able to spend quality time with some of our largest customers and best dealers during March of.
Of course product availability is top of mind for them right now, but with input input costs rapidly rising their comments centered on how we can enhance their productivity.
Not long after those discussions our board of directors and I visited Sioux falls to see the advanced autonomous vehicles in operation, which was timely and rewarding.
Field testing with customers will validate our technology and provide assurance their expectations will be met.
Our dealers are as eager as we are to serve customers and earn new ones and our CRM enhancements are making that easier.
So the topic of brand government does not exciting it is important to our dealers and the improved profitability and progress. It is driving as noted and appreciated.
Operational excellence is about accelerating productivity enhancing quality and keeping our employees safe.
<unk> bought them that our supply chain team did that in the first quarter, while also executing.
And creatively and often miraculously to ensure material was available to our factories and finished goods were shipped to our dealers.
They really delivered on our ambition to be the best for our customers.
Executing on these priorities will continue to make us better for our customers dealers investors and employees translating into market share gains and higher profitability.
I'll now turn the call over to <unk> to take you through some of our key financials.
Scott and good morning, good afternoon, everyone.
Quarter net sales of industrial activities of <unk> 2 billion were up 13%, mainly due to favorable price realization. Despite the FX headwinds of around one 5%.
Gross profit margin was 22, 2% up 60 basis points versus last year, thanks to mix and pricing.
Iraq segment deliver plenty for one gross margin 80 basis points better than the first quarter of 2021.
It was better mix some price realization.
I guess, we're stronger studying casing brothers cost from raw materials inflation and expedited freight.
<unk> gross profit margin was 13, 3% about 1% from the first quarter 2000, and since one of the highest of any of the last few quarters.
Adjusted EBIT of $429 million up 36 million from Q1, 2021 without a blessing to be modular pumping keep percent some 30 basis points versus first quarter last year on the back of higher sales and high end of the expenses.
Hey, guys. So I mean, thats activities was negative $1 1 billion.
This is higher than usual seasonal working capital cash absorption in the first quarter of the year.
Ladies anybody from our plans and high amount of vaccine eventually robotic partially finished goods led to higher than anticipated a teasing a little and ventures.
Q1, adjusted net income was 378 million or 28 cents.
Adjusted diluted EPS of <unk> 26 in Q1 of last year.
Reported net income $236 million reflects a one off adjustment of Russian assets for $71 million net of taxes.
Did you see an immediate impact of a <unk> just suspending activities in Russia.
Industrial activities net debt ended up $2 1 billion, an increase of 960 million from December 31, 2021, largely due to working capital absorption.
The end of 'twenty, one and available liquidity stood at $9 4 billion down $1 1 billion from December 31 2021.
Yes.
Turning to slide nine let's look in more detail at the performance for the quarter with the usual walk or the industrial activities adjusted EBIT by driver and by segment.
We see the volume and mix was positive for both segments, while increased production costs were more than offset by positive pricing.
SG&A volumes reflects increased activity levels and the expenses increased as we are investing more on our precision optical folio.
I will touch on adjusted EBIT increased $27 million with a margin of 12, 6% driven by favorable mix and price realization with positive contribution for the Americas, partially offset by higher raw material and freight costs and rolling out the expenses.
Again, adjusted gross margin was 24, 1% up 80 basis points from the same quarter last year.
Yes.
Higher volumes in construction equipment like logistic EBITDA of $32 million with a margin of 4%, thanks to favorable volume and mix and positive price realization, partially offset by higher production costs.
Gross margin for Comstock to was $15, 8% about 1%, primarily due to raw materials, partially offset by better mix and favorable <unk>.
For our financial services businesses.
Net income was $82 million up $4 million compared to the first quarter last year, mainly as a results of a housing recovery. So music Wiedeman safety, North America, and a higher average portfolio in South America and India.
These were partially offset by additional restarts in eastern Europe , mainly because of Ukrainian conflict and $15 million of one off charges of a rush on receivables, which is adjusted for that income we're looking at that consolidated theaters.
For the quarter retail originations were $2 1 billion in the managed portfolio, including JV at the end of the period was $20 8 billion.
Delinquencies were down year over year to 120% and remained at historically low levels.
Yeah.
Next on slide 11, we have the free cash flow and that's an absolute position performance of our industrial activities.
Can you just show up with Doctor activities was negative $1 1 million largely due to seasonal working capital cash absorption.
In the first quarter with EBITDA you overproduced retail why this happened also this year due to the no supply chain disruption, we produced less than planned and later within the Florida.
He has created a situation of high inventory of finished goods Mandy many of which are in transit on March 31st.
Inventories when in fact lower than you're already low levels of Q1, 2021 and factors in construction equipment and all the marginally higher income buyers.
In addition, we have again, a large fleet of semi finished equipment waiting lots before being shipped for numbers luminous class.
Based on current visibility of our collateral schedule, we expect themselves through a large portion of this inventory in the second quarter.
Although that was $21 3 billion at March 31st on industrial activities net debt position was two 1 billion.
Liquidity remains strong at $9 4 billion, although slight slightly down from year ago, as we have funded working capital with available liquidity.
During the quarter, we made progress on many of our capital allocation priorities aligning to the capital market day two months ago.
Organic growth accelerated in the quarter with Capex of 53 million up 47% year over year and that would be up 39% for the same period as we increase our digital technology spend.
If February Moodys Investor service upgrade to the company's senior unsecured rating from <unk> three to be a tool with stable outlook.
He follows the Fitch upgrade of our Lone star rating by two notches to take will be a plus you know they generally.
Additionally, during the quarter the company repurchased one 5 million shares for a total cost of approximately $18 $4 million.
Holders of authorized additional purchases of up to 10% of the company's common shares and extended the Bureau for additional 18 months, while we have a standing program in place to Opportunistically buy up to $100 million in shares.
At the annual meeting in April if shareholders approve the proposed dividend of 28, <unk> 10, a share for a combined return of 380 million viewers, which will be paid on may 4th to shareholders of record on April 22032.
In terms of inorganic growth as Scott mentioned at the outset of the call and announced last Friday, we have divested the Raven foam business for $350 million.
And ive interested parties for the sake of Arabian business, we want to divest.
I will now turn the call back to Scott.
Thank you Donna.
We expect global AG industry demand remained resilient due to lower soft commodity reserves geopolitical pressures and the impact of recent Edward adverse weather in parts of North to South America.
Well it remains generally positive farmer sentiment has decreased during the first part of the year largely due to price volatility and strained availability of fertilizer and equipment.
Input costs are a challenge, but do prompt upgrades to more efficient and sustainable methods of farming and working which is reflected in our technology adoption rates elevated.
Commodity prices will continue to bolster farm incomes and encourage those who can to expand row crop planning.
Comparing this 2022 AG industry demand estimate with the one we issued at the beginning of the year. The only substantive change is lower volumes in Russia, Ukraine and Turkey.
For construction equipment or industry estimates are largely unchanged, except in South America, where we see some upside to demand in an election year.
With solid recent print of the Abi and demand for customers ahead of.
Projects related to the U S infrastructure Bill there could be also potential upside to our north American market estimates.
Our visibility and too often lack of parts availability continues to be challenged by the conflict in Ukraine ongoing supply chain lumpiness and the effects of the pandemic, which are still a significant factor in some geographies.
Despite risks we are confirming our previous 2022 guidance for industrial activities.
Full year net sales are expected to grow between 10, and 14% including currency translation.
We will continue to invest to improve our business, but expect to keep SG&A at or below seven 5% of net sales.
Free cash flow for industrial activities is expected to exceed $1 billion.
Randy and Capex will be approximately $1 $4 billion combined spend for the year.
Although supply chain challenges now appear to be a headwind throughout the year, we do expect production and retail sales to increase in Q2 and beyond of course, this may be quite volatile depending on the cadence supplier shipments and the duration of fighting in Ukraine.
From a broader economic perspective, I am less pessimistic.
Less optimistic the negative GDP print in the U S. Last week was a surprise, but we are anticipating weak reports from Europe .
Interest rates are rising inflation is ramping and China is largely locked down and thus we will not be surprised if there is a global economic slowdown in 2023.
Nonetheless, as our current outlook indicates we think that global food demand and associated productivity needs will support our industry better than others.
While supply pressures persist, we will maintain our focus on managing them and minimizing any associated inventory buildup.
As many of you have likely seen our contract negotiations with the United Auto workers for our plants in Racine, Wisconsin, and Burlington, Iowa.
It hit a roadblock yesterday.
Our previous contract expired on Sunday May one and on Monday morning, We were advised by the union of their decision to call. The represented employees out on a strike.
The unions' decision to strike was disappointing we had several weeks of constructed that constructive dialogue, but when the contract expired. We remained very far apart on some important issues.
The very nature and purpose of a strike is to disrupt our business and create concern amongst our customers. Despite that intent <unk> industrial is committed to reaching an agreement with United Auto workers.
We have made ourselves available to meet at the bargaining table at anytime.
We are determined to satisfy our commitments to our customers. The communities, we serve and our other employees. It is our intent to continue operations and to that end. We are prepared with a contingency plan that should minimize impact to our operations, our dealers and customers certainly lead us to.
Dealer views on the AG and CE economies generally remain robust and positive which is validated by our order books, we endeavor to get them the products they need to support our customers and we'll be judicious in managing their inventory as we do.
Elevated capex and R&D spending will continue as we invest in new vehicles precision technology solutions and alternative propulsion.
Additionally, we are increasing the number of rate and Raven products flowing through our global distribution channels.
We are creating a constructive path to lower cotwo emissions and improve our product offerings as part of our science based target initiative commitments.
Between the new Patriot Sprayer, the new Holland, seven tractor and many other introductions our model year 2023 products are exciting.
There is a tremendous engagement and execution of our global team.
We're truly breaking new ground.
That concludes our prepared remarks, we will now open the line for questions now. Please go ahead.
Thank you Dear participants as a reminder, if you wish to ask a question. Please press star one on your telephone keypad.
The first question comes from the line of Kristen <unk> from Oppenheimer. Please ask your question.
Okay.
Great. Thank you so much.
Wondering if you could talk a little bit about the pricing and currency assumptions that are now baked into the full year guidance versus what you. Initially guided a couple of months ago. Just seems like a lot has moved around in those assumptions and I'm wondering if you can help us understand the puts and takes there. Thank you.
Yeah, I think we can say we have some more pricing also we have some more cost on the other side.
And plenty is now a bit more.
Negative on our on our little sales.
Since the dollar has strengthened.
Okay. Thank you and then you called out market share gains and in the prepared remarks, you talked about at the capital markets day about 200 basis points aspirational market share gain can you just give us a sense of the success that you had in the quarter, what's driving that and how sustainable do you feel.
That can be thank you.
Yeah, well our ambition is certainly to have sustainable market share improvement over the plan period. The current environment really dictates that availability is the sole driver of market share movements. So.
I'm not reading much into what's happening right now because it's literally who has products in dealerships and get that out of our team's doing a really good job with supply chain, but certainly you know in some of our products and some of our product lines, we're really not as good as we could or should be so while we did gain market share and in some regions.
Some product lines, it really strictly around availability right now and I don't think that's a sustainable way for us to look at it. So it's really the investments in new product offerings.
The value that we can create with our precision offerings that I think is going to be the long term contributors to market share, but that wasn't the case in the first quarter.
Yeah.
Yeah.
Excuse me I just couldn't have you finished with your questions.
Yes, I'm all set thank you perfect. Thank you very much. The next question comes from the line of Tami Zakaria from Jpmorgan. Please ask your question.
Hi, Good morning, everyone. This is Tom seminar thrombosis Tommy.
Hi, John .
Hi, Seth.
Last quarter I think you commented that 30% to 40% of your backlog is backed by a retail order could you update us on the retail versus wholesale mix of the orders year to date.
Yeah that that has actually increased in most of our markets.
We certainly shift a bit less than we expected to and I think there is anxiety amongst most retail customers to be able to put their hands on iron when it does at the dealership. So we've seen that number move up almost double from what it was at the end of the first quarter more in the 70% to 80% range.
Yes.
Thanks, and then just a clarification I think you said that you're expecting your production levels to increase from the second quarter onwards can you confirm if that is contingent on strike resolution.
No I will not confirm that it is contingent on the strike resolution of the strike is it's very unfortunate.
But we knew it was a possibility and.
It's very unfortunate, we certainly want to get our team and.
In Racine and Burlington back as quickly as we can but we built our plan so that we can operate.
And really it's two of our 38 plants and we've got you know overall I think well.
Well below 10% of our global production and we are continuing to operate.
The plant so.
I don't think you would I would not say that.
Forecast, we just provided was contingent upon any aspect there we knew there was.
We planned for higher labor cost, we knew there was labor risk and we've planned for those contingencies and we will continue to work as quickly as we can towards a negotiated settlement of some beneficial to all parties.
That's very helpful. Thank you I'll pass it on.
Thank you. The next question comes from the line of Ross Gilardi from Bank of America Pease ask your question.
Hey, good morning, guys.
Or are you guys.
Alright.
The 11% revenue growth and act.
In the quarter with it sounds like essentially no volume growth and now production is improving so should we expect AG revenue growth to accelerate through the year and then in terms of the normal seasonal pickup the C N AG.
Revenue I mean, if we go back to.
Most years for the last seven or eight years, excluding 2020 with Covid and I think 2015.
Which was a difficult time in the cycle I mean AD revenue normally goes up close to 30%.
Second quarter versus the first quarter and just given what you're seeing do you expect it.
We returned to that is it realistic to expect to return to that type of.
Growth trajectory Q1 to Q2.
There are also appreciate the the history lesson in and that's exactly how we're looking at it you know obviously.
As we said about 16 times on the call lights convinced depends on the supply chain, but the team's done a really nice job of dealing with the dealer to dealer inventories are extremely low. So we would certainly expect that the trend that you laid out to be what we're aspiring to deliver.
Okay. Thanks, Thanks, Scott and then just.
Your latest thoughts on your your agriculture margin, specifically I mean do you do you get back to a 20% to 25% incremental margin for the full year given.
You know what you did in the first quarter and just what you're seeing right now and then what about gross margin, but your gross margin was up 60 basis points year on year.
Pretty much the toughest of all environments with all the production challenges in raw material cost pressure and is there any reason why gross margin would be up at least 60 basis points for the full year.
No I mean, that's certainly how we're expecting.
Eric and stepping up really done a nice job with keeping price ahead of cost and we expect to continue to be able to do with that there are some.
Incremental costs coming in but I think the team has demonstrated a nice job of working through those we are do have a number of new product introductions that will be helpful to margins as well. So we do feel reasonably good about it but don't underestimate how difficult the environment is it it's a battle and.
I'm proud of the way the teams handling through it.
Okay. Thanks, and then just one last one Scott I mean, just overall on the AG cycle I mean, how has your thought process evolved on the longevity of the cycle since the Investor day.
Russia's invasion does the flattish planning assumption in 'twenty three 'twenty four they just seem more or less appropriate to you or just any any subtle changes in thought more on the longevity of the cycle, yeah, well I mean, it was not exactly helpful that the invasion happened the day of our capital markets day.
But the I mean, it's so unfortunate for those that are impacted by it so I shouldnt make light of it but nonetheless.
What we are seeing and I said it in my prepared remarks that the global economy doesn't appear very good to me.
I'm, probably more positive on the AG cycle, then I was just because you know soft commodity prices are up so much in really weak specifically availability is down considerably.
You know in late planting in the U S. It's just it's really shaping up to be a keep the commodity prices soft commodity prices high which is offsetting some of the input costs. So I do think the AG cycles, probably got a little bit more legs to it than I would have.
Suggested several months ago.
Thank you.
Thank you. The next question comes from the line of Martino Dambrot deep from equities. Please ask your question.
And good afternoon, everybody. The first question is on the on the on the guidance are you are an underlying assumption of 115 that you already had a question on this but the.
Can I ask you what is the sensitivity the rule of thumb.
Uh huh.
Dollar Euro dollar.
Right.
Sales adjusted EBITDA and free cash flow depth.
So.
Rule of thumb for revenues, all I would say.
1% lower revenues by every five cents of dollar appreciation some planned out.
Then we have <unk> Reais U S. Dollar has that right now so all doesn't positive on India.
And for EBIT EBIT, so it doesn't affect too much or is not impacted too much by hour.
By exchange rate, we have a good chunk of our cost in Europe .
And the free cash flow or depth as you prefer.
There may be some tailwind on that that conversion because if you will.
Some of the Euro base debt.
Okay and this is not the main reason for the change in the free cash flow guidance.
No it's not.
Okay I didn't change the guidance for the free cash flow.
We we kept the same Ah just above 1 billion.
Okay. Okay.
Second question is on the operating leverage.
Of the two divisions are standalone, because under the new macroeconomic environment.
Some finished changing I don't know.
We still forecast revenue growth.
In both.
And.
<unk>.
So I wouldn't see.
On a non loss operating margin change from installed at all so I'll break 11, a change from historical performance.
Okay, and the prices for the full year and our euro assumption for the diesel better leverage.
It was 11, 12% in the first quarter.
Should we expect the similar or even higher.
For the full year.
I will go for ischemia.
Rather than the higher.
Okay.
Yeah.
Sorry.
I would go for assuming that rather than the higher so state at the same time that we have to go up okay and very last one prices are after the renegotiation of the label around the contract.
Would you be able to.
Also set to these through price increases because typically our Florida production costs of raw materials, and so on but should we expect that the ability to cover it.
I think it's probably better to assume that we anticipated higher wage inflation and put that into our pricing already.
Okay I cannot ask you how much ofer.
[laughter] good track.
Okay. Thank you. Thank you.
Thank you. The next question comes from the line of Daniela Costa from Goldman Sachs. Please ask your question.
Hi, Good morning. Thank you just two questions from me.
Wanted to follow up on the demand commentary I mean, there are some categories that you mentioned industry demand in the release has has been down in the quarter because I think some categories of combined for example, Ah shall we see those has more visit common steadying influence. The dozen are more like one off and you still see overall a strong environment.
Sort of trying to to think about farmer.
Farmer sentiment versus consumer sentiments versus low dealer inventories.
If we should read anything in from looking at those categories that are down.
And then just second question just related to your backlog and the stickiness of that backlog can you comment a little bit on the type of level of advances that farmers need to food when they or their.
Equipment and the things that we should look into to have confidence that all the backlog will be deliver and theres no cancellations. If the macro are you selling more bearish micro scenario materializes. Thank you.
Well first on the demand question.
I will tell you that it I've said it as it relates to retail performance and market share gains, but it also is true for the overall demand.
Where we saw down markets and I've looked at what's happening in the industry as well as its happening for us it is solely related to product availability. So.
As we ended the quarter with much larger fleet inventory that means product wasn't available for the dealers and therefore, they couldnt couldnt take it. So it really was not related to anything I mean, we are seeing we talked about.
Farmer sentiment being decreasing it's still above the historical norm, but it is coming down with <unk>.
Particularly the higher input cost and then the lack of availability of.
Both fertilizer and equipment.
But we're not seeing that in any demand impact at all at this point you know we're watching for it.
And but nothing is suggesting that that anything other than an availability that is impacting demand at this point.
And as far as the second question was related to I'm sorry.
Backlog stickiness in terms of what's the level of advances yeah. Yeah, you know I don't think even our best dealers are getting significant down payments on backlog, we know that it could be cancelled I will tell you that the what's happened because of low availability of used farm equipment.
There's a lot of times people, they really need to take it because they don't have something they've sold something so they need to get it in and I think that's probably better than any downpayment, we could get.
So.
We're aware that some of these orders may fall out, but it's better to have a retail order at the end and just having it go into dealer inventories. So on balance I think we're in reasonably good shape.
Got it okay. Thank you alright, thank you.
Thank you. The next question comes from the line of Courtney <unk> from Morgan Stanley . Please ask two questions.
Hi, Good morning, guys I'm wondering if you can just share a little bit of insight into the supply chain.
What you're seeing in Europe versus North America, and and if theres any sourcing issues out of out of China right. Now you know just just where where are the biggest pain points and then you know I know that you are not providing a margin guidance, but can you just talk at all about how your expectations for improvement.
Improvement I think last quarter, you had told US you were expecting semiconductors to be very similar this quarter as they were last quarter, just any difference as to how you're thinking about the supply chain at this point relative to last quarter I think the big difference from last quarter is that we are not expecting the overall supply chain.
<unk>, including semiconductors to get better throughout the year. It is at this point.
We believe going to be a battle throughout 2022 and potentially longer than that again I'm extremely proud of the way. The team has figured out how to navigate some of these challenges in semiconductors is is one that especially.
It's a brutal situation, but we've managed for five or six quarters now to handle it pretty well and I think we will continue to be able to do that.
The overall I mean, the situation with supply chain, obviously, the the lockdown in parts of China has not helped the war hasn't helped.
But we're dealing with three or four 400 suppliers that we're expediting and you know that.
And unprecedented number, but it's kind of consistent with what we've been doing for the past few quarters. So the teams kind of built some muscle and capability to do it but I'm not seeing and again you asked the question specifically around Europe .
Early on in the foundries and when I say early on early on in the end the war in terms of the foundries were essentially shutting down because of higher electricity costs, and we were able to navigate around that.
And we're getting through most of those issues, we are expecting theres additional hiccups that could come out of the Russia, Ukraine region Pig Iron is one that we watch really really closely.
But generally speaking I hate to say it Europe's no worse than North America I mean, it is the supply chain is difficult.
It's a battle, but again I think.
I'm quite pleased and impressed with the way the team is managing through it.
Okay, Great. Thanks, and then you mentioned a couple times on the call that you know.
Our sales is really a function of availability at this point on your industry outlook I do think you've reduced some outlook, especially on the on the construction side in Europe .
And slightly and in rest of world.
Is there anything that you're seeing that's impacting that industry outlook from a demand perspective or is that also just a reflection of availability at this point.
I think that's probably related to Turkey, Russia and Ukraine.
Which we.
We're down there for sure.
But our construction business in Europe , specifically has had a rough.
Decade or so.
And the team's done a nice job of getting putting there and with some periodic coming on we are going to see a construction growth and actually profitability for the first time in a long time.
In Europe . So if there was negative numbers I'm pretty sure it's related to the region has been affected by the war.
Okay, great. Thanks.
Thank you.
As a reminder, if you wish to ask a question. Please press star one on the telephone keypad.
The next question comes from the line of Francois for the lot from intermodal to please ask your question.
Hi, everyone. Thank you for taking my question.
Just a quick one to understand the the new guidance was the previous guidance, including all three divisions.
Secondly, I mean, it wasn't for your sales guidance.
Oh three divisions on the Raven and does the recent sale of the division.
Turning to victory.
So that's why we created the D E F E N V and the other division is a bit of snow for sale. So.
We have included in any of the numbers.
You wouldn't use a previous guidance not anybody that's why that's not in the first quarter.
Oh, Okay. So not in both if I understood correctly.
Okay.
On the precision I know you mentioned that or even penetration. These are you increasing ah.
Can you give us some more color on that and who how you manage to navigate it notwithstanding a tough supply chain situation in the first quarter.
Yeah I think.
One of the benefits of making the acquisition is instead of Raven trying to get into our dealers. We have all of our our salespeople also helping to poll Raven through our channels and I think that's what's driving the extra penetration what what ultimately is the main.
Benefit profitability drivers integrating raven into our.
Our vehicles and.
Equipment, but right now we've got a great opportunity in the aftermarket and that's what you're seeing us take advantage of it.
Okay any change you can give us.
Some estimate of an impact on your first quarter sales from from this integration.
Don I had John is shaking his head so that means no.
Okay. Thank you.
Thank you. The next question comes from the line of Steven Fisher from UBS. Please ask your question.
I think I heard you say something improved in April did I hear that correctly and if so what exactly improved and why it must've been a misstatement.
No I'm kidding.
No we did see production improve in the quarter.
Talked about.
We ended with a much heavier.
Inventory level, we were able to work through some of that in the quarter, but also see the plans to be more productive. So it was a benefit of both.
Okay.
And with supply chain not expecting to get better should we expect retail sales to year over year kind of align with your own sales because I'm still a little unclear as to why your sales volumes seem to be ahead of it.
Retail sales for Q1, it seems like it should basically just be if there's.
Farmers are clamoring to get whenever machines are available it seems like it should just be a fairly seamless pass through.
No I would agree with you know we are.
I would love to be able to get inventory in our dealers up a little bit throughout the year, but that's not in our plan.
Okay, and then maybe lastly here.
Not sure where you can say about this but it seems like.
There's a playbook for resolution of the labor situations.
So maybe you can just.
Help us with anything that's different about your labor situation versus that of your competitor and how that was resolved late last year.
So I think the big difference is.
The number of there they had a much larger percent of their.
Hourly employers leveraged by the Union.
It's multiple factors higher than our 20% and that's the big difference.
And also we've got so many other factories, where we can produce and we've got the ability to bring in we did not have we have our salaried workforce and contingent labor, helping us serve our customers, which is our primary goal, but we're committed to reaching an agreement. We again, we had several weeks of good dialogue.
With the UAW and.
We believe we made a very fair offer we're continuing to be willing to negotiate and we are optimistic that we can resolve this and thats, what we need to do for our employees and for our customers, but we.
We can't look at the <unk> situation and make a that's the playbook, we're going to follow because it's a very it's apples and oranges really.
Okay. Thanks, a lot.
Yes.
Thank you Yeah participants as a reminder, if you wish to ask a question. Please press star one on your telephone keypad.
There are no further questions. This will conclude the question and answer session.
I would now like to turn the call back over to Noel White for any closing or additional remarks. Please go ahead Sir.
Thank you very much thank you to everybody for joining.
Yeah.
That will conclude today's conference call. Thank you for your participation ladies and gentlemen, you may now disconnect.
[music].
Okay.
[music].
Okay.
Sure.
[music].
Okay.
Yes.